CEO don't control the stock price, or do they?

I've been wanting to comment on Robert Nardelli's resignation as CEO of Home Depot for some weeks. Actually not the resignation per se, but on one prevalent theme that media commentators have used to explain it. I'll pick on Alan Murray of the Wall Street Journal to start, quoting from his comments on Jan. 4th.

"Some of Mr. Nardelli's numbers were hard to argue with. In six years on the job, he doubled Home Depot's sales and more than doubled its earnings." Mr. Murray then goes on to explain that it was Nardelli's lack of political skills that doomed him more so than performance. To give Mr. Murray credit, he also mentions other performance factors that might have hurt Nardelli as well, including poor stock price returns, and pushing Home Depot into the "low margin wholesale business".

Matt Koppenheffer of the Motley Fool says it more directly. "Had Home Depot's stock price headed up and to the right during Nardelli's term, investors might very well be patting themselves on the back for money well spent on a great executive." Essentially, because the market stubbornly refused to reward Home Depot shareholders for Nardelli's great management, he was forced out, with his only real sin being his arrogance.

Is Home Depot really a better company for Nardelli's efforts? Let's look at the numbers. Nardelli is credited with doubling earnings and sales in six years, a compound annualized growth rate of about 12% per year. But in the single year before Nardelli took over, Home Depot grew sales 26% and earnings almost 50%. At that pace sales would double every three years, not six.

So it's a myth that "Bob Nardelli doubled sales at Home Depot", those sales were doubling whether he was there or not. Sales actually grew much slower under his watch. That's not necessarily bad, Home Depot was growing fast enough that it would soon run into saturation problems. But almost any CEO running Home Depot would have come close to doubling sales, so why credit Bob for that?

And Bob "bought" some of this growth by expanding into areas outside of the Home Depot's greatest area of expertise, retail, into wholesale distribution. You would think this lack of focus could hurt retail execution, and it did. Even worse was Bob's approach to customer service. Nardelli improved margins by hiring less skilled and dedicated employees on the front lines, i.e. by paying less. But those employees were a huge part of the Home Depot brand, which is what made Home Depot successful to begin with. That brand created those high margins, and when Bob reduced that service, he angered his best customers and gave a huge gift to his biggest competitor, Lowes. It's very clear that retail performance, the most important criteria for measuring the CEO of Home Depot, declined under Nardelli's tenure. He as much admitted this when he attempted to stop reporting same store sales in his final year.

Nardelli's decisions made Home Depot's results look better in the short run, but the short run is over. So was Bob fired over anger at his pay package, or his arrogance at the last shareholders meeting? Or was it because Bob's "success" appears to have been a short term house of cards built on buying revenues and under-investment in their core business?

CEO's can't directly control the stock price in the short run. But the key decisions they make can create or destroy large amounts of shareholder value, and will eventually be reflected in the stock price. In Bob's case, I think the stock price has clearly reflected how the market perceives his "contributions".